Quarterly economic and investment update

This Quarterly update is written by Matt Vickers, principal adviser of Snowgum Financial Services. It provides a summary of key data for 2016 before discussing the emerging industry and social trends for 2017. We finish off with commentary on key asset classes and how we are positioning portfolios for our clients.

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Looking back on 2016

2016 was a year of shocks and recoveries. Brexit, Trump, Italian banks and a Chinese stock bubble bursting saw plenty of volatility in investment markets. In all cases markets recovered and the lesson is a positive one. Long term investment trends trump short term volatility. For those who can hold their emotions in check, 2016 market shocks will be little more than forgotten blips in the gradual and compounding accumulation of investment wealth.

Key Stats

Australian inflation remained low at 1.3%

RBA cash rate finished up at an all-time low of 1.50%

The Australian Economy grew at a rate of 1.8%, significantly lower than predictions this time last year.

Average house price in Australia at the end of the year was AUD$623,000

Unemployment finished at 5.6%

European Central Bank, Bank of Japan and Bank of England continued to inject USD$130b of printed money (via quantitative easing) each month.

Social stats for 2016

Nationalism and indeed fascism is on the rise as indicated by the following 2016 events;

Brexit

Trump

Austria barely avoids electing ex-nazi sympathiser as president

Marine Le Penn’s ‘National Front’ holds 28% of votes in France

Sweden’s right wind party, founded by nazi-sympathisers has grown from 2.9% of the national vote to 19.9%

Investment and industry trend predictions in 2017

The technology revolution continues and each year that passes sees a doubling of its impact on society and the economy. We discuss some of the expected trends that will emerge as serious economic disrupters in 2017.

Health Care

Health care is evolving from traditional medicine treating ailments and their symptoms. Medical advancement in the future will occur more and more at a cellular level altering the body itself to deal with the problem.

By 2020 it is very likely humans will be seen medically as complex strings of code. Medicine has become an information technology industry and its evolution will become exponential. Technology capabilities, not traditional medical practices, will define this industry into the future. Two exciting examples of this are:

Stem Cell Revolution

Stem cells are undifferentiated cells that can transform into specialised cells.

Technology has now overcome the ethical issues of gathering stem cells as they are now easily engineered.

The stem cell market is expected to reach $170billion by 2020

Transplants may become redundant if stem cells enable humans to regrow their own organs. More here

The following stem cell advancements took place in 2016

In Osaka Japan stem cells have been used to regrow Human Eyes.

Stem Cells have been injected into a damaged cervical spine of a recently paralysed 21-year-old man. Dramatic improvement in sensation and movement of both arms was exhibited within months

Immune Engineering

T-Cell engineering manipulates cells within a patient’s white blood cells to code the immune system to target previously unrecognised ailments like some cancers.

This ideological approach to treatment means the focus is on understanding the cellular structure of everything and then reprogramming cells with genetic manipulation and gene alteration to essentially ‘clean the code’

Driving & Transport

The long-term future of transport is communal, driverless and electric vehicles that enable cheap door to door transport for all. Vehicle ownership will become redundant for practical purposes and the freed-up driving time will provide a significant productivity boost.

Significantly reduced numbers of cars, due to higher utilisation rates, will improve congestion, reduce waste, incentivise faster car life turnover and improve safety. All these factors incentivise the long-term trend towards decentralising how we live.

Apple, Google, Uber and Tesla are already in a technology arms race to be the provider of this extremely lucrative driverless car technology ecosystem.

Inequality and Populous politics

The latest technology and innovation boom has created a tremendous amount of wealth. All individuals, on balance, are significantly better off than they were ten years-ago. Globalisation, which reduced barriers to accessing human capital, allowed much of the wealth gains to flow to educated workers in both the developed and developing world. Reduced barriers to human capital also gave low-skilled workers in the developing world a strong cost advantage over low-skilled workers in the developed world.

As a result, the notable missing beneficiary in the technological wealth creation boom are low-skilled, developed world workers. They are not worse off than they were five or ten years ago, but, their fellow high-skilled countryman have become much better off over the same time-frame.

This is highlighted by:

The world’s 8 richest billionaires’ having wealth equal to the bottom 50% of the world’s population

The worlds’ 10 biggest corporations having revenues greater than the poorest 180 countries.

There has always being significant inequality between nations, this hasn’t changed dramatically. It is the inequality within nations that has undergone dramatic change, and this creates a heightened sense of inequality and relative injustice.

A paper by Maferima Touré-Tillery and Ayelet Fishbach (2016) discussed the relationship between Perceived Distance on the Expected Impact and Likelihood of Charitable Action. The paper demonstrates that there is an inverse relationship between empathy and distance of human contact. I.e. we care less about somebody the further they are from us. This inverse relationship likely applies to other emotions, such as the sense of injustice associated with inequality. It is the inter-country inequality that has driven discontent and led to the nationalistic and fascist sentiments we see arising in the developed world

One positive outcome from inequality is that some of the recent beneficiaries of wealth are utilising their resources for humanities greater good. The following are significant examples:

The above trend of highly resourced individuals tackling difficult problems is in significant contrast to more nationalistic focussed governments who lack the political currency to tackle global problems.

Our long-term prediction

Decentralisation

The home of tomorrow will not be penalised for distance.

3D printing will evolve to essentially replace convenience shopping. Need a new shirt, download the code for the shirt design you like and send it to your 3D printer.

A fleet of driverless couriers will take away the inconvenience of having to do your own shop. Further in the future, continued advancements in protein recreation will see your 3D printer take care of food production as well. Vertical agriculture will also drive this trend

Need energy? You’ll be off grid with cheap solar production and efficient battery storage

International Equity – International equity, particularly in the US, is very expensive. Markets warmed to further spending under Trump, but with a world a-wash with low interest rates and cheap money, markets are stretched to eye-watering valuations. Passive exposures are not suitable in stimulus driven economies like Japan, the US, the UK, and to a lesser extent the EU. Active management, code for picking good companies in good industries, is required.

Domestic Equity – The Aussie share market has followed the US market higher. Be cautious with passive exposures and continue to be selective.

Cash – Cash provides a good store of capital whilst waiting for things to cool off elsewhere. Should the UK, Japan or ECB announce a wind back in stimulus, markets will trend lower.

Property – There is a lot written elsewhere on property so I will leave you with a less reasoned conundrum.

Sanity would lead most to believe that Australian residential property is at the top its cycle on any normal valuation, income ratio, affordability or credit worthiness metric. However, should there be more insane people than there are sane, the sane people become the insane and miss out on further growth.

Trump’s election victory makes us question consensus sanity.

DisclaimerAny advice contained in this update is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice. Prior to investing in any particular product, you should read the Product Disclosure Statement.